AND IMPACTS MANY OF THESE ARTICLES. they are correct at the time they are written. however, IT IS NOT POSSIBLE TO RE-WRITE EVERY SINGLE ARTICLE AS EACH LAW CHANGES. PLEASE MAKE SURE YOU RESEARCH THE LATEST RULES REGARDING YOUR INTENDED FINANCIAL DECISION. IT IS ALWAYS BEST TO CONSULT A PROFESSIONAL (CPA, CFP, ESTATE ATTORNEY, ETC.)
RETIREMENT IS TOO BIG AND TOO IMPORTANT TO SCREW UP
What is the S Fund Exactly?
I hear ALL kinds of rumors related to the S Fund. Many of which just aren’t true. I feel like it’s one of the most misunderstood funds. So let’s take a quick peek under the hood, shall we?
History And Background
The S Fund was born on May 1st, 2001. Prior to that, we just had the OG's: G, F, and C.
(Personally, I would argue we were better off before, but I’m sure that’s an argument some would gladly take up with me).
The S Fund is one of the 3 stock funds that we have in the TSP. The other two being the most popular C Fund, and the least popular I Fund. The S Fund is in between. The S Fund also falls between them in terms of how aggressive (risky) it is. TSP gives it a 4/5 on the risk scale. (C Fund gets 3/5 and the subpar I Fund gets a full 5/5 in risk.)
The S Fund does clearly hold its own in one category however—fees. It’s the most expensive of all TSP funds. (more on that later)
The S Fund seeks to track a very specific (and somewhat obscure) index. Before I go into which index it is, what’s an index? With regards to the stock market, an index is a group, or a basket, or a conglomeration of companies that are all lumped together for tracking purposes. For example, let’s say you only wanted to track the financial sector of the stock market. McDonalds and Tesla would be of no use in that endeavor, so you wouldn’t include them in your basket, or index. But you WOULD include Bank of America, Wells Fargo, Vanguard, JP Morgan/Chase, Charles Schwab, etc. There are dozens, if not hundreds of indexes. People grouping different stocks together for different investment purposes. The most common indexes would the SP 500 Index or the Dow Jones Industrial Average Index. These are reported on daily in the financial press. But there are many others.
S Fund Index
In the case of the S Fund, the index that it is based on is the Dow Jones U.S. Completion Total Stock Market Index. Just rolllllls off the tongue, doesn’t it? So what exactly is that? This index is comprised of what is generally called Small and Mid Cap Companies. Meaning, not the largest companies in the U.S. At the risk of oversimplification, you could think of it as this: The SP 500 Index is the 500 largest U.S. companies that are publicly traded. The S Fund would start with the 501st largest company and go down to the smallest U.S. company that is publicly traded. Some of these companies are very small and rarely trade. Some of them are selling for less than $1 per share.
(To dispel some myths, the S Fund is not the same as the Russell 2000, the NASDAQ or any other host of things I hear people say.)
Unlike the SP 500, where you would know many of the companies by name (McDonalds, Apple, Tesla, Nike, Home Depot, Amazon, Walmart, etc.), you might not know as many companies in the S Fund. The largest companies in the index would be Snowflake, Crowdstrike, Workday, KKR, and Marvell Technology.
This number changes literally daily, but there are about 3,500 - 4,000 publicly traded companies in the US right now. If 500 are in the SP 500, that leaves (approximately) 3,500 or so in the Dow Jones U.S. Completion Total Stock Market Index, which the S Fund is trying to replicate.
When I say “trying to replicate”, understand that the S Fund doesn’t actually buy and sell 3,500 stocks on a daily basis. They (BlackRock and State Street—our TSP investment managers) purchase representative holdings that approximate the return of that DJUSCTSM Index. In other words, the S Fund might be a little bit off from the actual return of the Index, but it’s going to be very, very close. For our purposes, we can say it’s the same.
So to simplify, the C Fund (SP 500) is the largest 500 U.S. companies, the S Fund (DJUSCTSM) is the smaller companies. There are no overlaps between the two. If you invest in the C, you own a representation of the 500 largest companies. If you own the S, you own a representation of the smaller companies. If you own both C and S, you own a representation of all U.S. companies that are publicly traded.
If you would like to track the index real time, the ticker symbol is ^DWCPF.
The S Fund in the Real World
As I have said repeatedly before, the G Fund is the only fund that is proprietary, or unique to the TSP. It is not available to the general public. Every other fund we have is widely available on the open market at Fidelity, Vanguard, Raymond James or whatever flavor of investment company you prefer.
If you want to replicate the S Fund out in the private sector, you are looking for a mutual fund that follows, or seeks to duplicate, the Dow Jones U.S. Completion Total Stock Market Index. If that’s your bag, you’re in luck:
Vanguard has the “Vanguard Extended Market Index Fund”, ticker symbol VEXAX
Fidelity has “Fidelity Extended Market Index Fund”, ticker symbol FSMAX
I can’t find an exact duplicate at Schwab. It seems to me that Schwab breaks that index into two separate funds: A mid-cap and a small-cap. Mid-cap is “Schwab U.S. Mid-Cap Index Fund”, ticker symbol SWMCX, while the small-cap is rather obviously named, “Schwab Small Cap Index Fund” ticker symbol SWSSX, although if you dig deeper into this fund, you’ll see that it does contain some of the mid-cap stocks, so it’s not a 100% match.
Regardless, if you’re looking to replicate the S Fund in your personal portfolio, you’re looking for a fund that invests in U.S. companies that are smaller than the ones included in the SP 500 Index. I’ll let you go out and look for those if you want that. If you’re also investing in the SP 500, then maybe you can simplify things and instead of getting multiple mutual funds, you purchase one that encompasses ALL the publicly traded U.S. companies.
Fees
As I have pointed out ad nauseum, the TSP fees are not lower than the private sector. In almost every case I’ve researched, they are MORE than the private sector, when you compare like investments. The S Fund is no different.
Vanguard’s VEXAX Fund’s total expense ratio is .06%, or about 1/4 less.
Fidelity’s FSMAX Fund’s total expense ratio is .035%, less than half of the TSP.
Since I could not find an exact replica at Schwab, I didn’t bother to report those fees, but you’re just a few clicks away from researching them if you’d like.
Performance
How has the S Fund done? Pretty good. Certainly far better than the I Fund. Not quite as well as the C Fund, particularly lately in a higher interest rate environment. We won’t go into all of that, but it should make sense to you that higher interest rates affect smaller companies more, since they are typically the ones that are funded more on debt, and thus paying interest. Apple, for example, has a mountain of cash on hand, so the cost of borrowing money is not necessarily going to impact them, since they don’t need to borrow.
If you go to TSP.gov and look under the performance, you’ll see the S Fund has lost to the C Fund for the following periods: 1-year, 3-year, 5-year, 10-year and “Since Inception”. (Although, I would say that “Since Inception” would not be a fair comparison since the C Fund came out in 1988 and the S Fund didn’t come out until 2001. So two, totally different time periods.)
This hasn’t always been the case. Some years and some periods, the S Fund has beaten the C Fund. But again, in this higher interest rate environments, the larger, more stable companies are going to be less susceptible to having increased interest payments cutting into their bottom lines.
Recommendation?
Should you invest in the S Fund? Don’t ask me! I don’t give advice on investments, diets, or relationships. It’s up to you and what you’re trying to accomplish. If you like owning the entire stock market, you probably want the C and the S. If you only want the larger, more stable, less risky companies, you want the C. If you want to take more risk in the hopes it pays off, you are probably looking for the S Fund. And if you want to just throw your money away, you’re gonna go with the I Fund. (Just kidding. Just kidding—don’t send me hate mail about how the riskiest, most volatile, lowest return on investment stock fund we have is still a great deal. You know—for diversification.)
Hopefully this helps clear some things up regarding the S Fund.
